Is Childcare Australia's Golden Investment Opportunity?

By Michael Kark, Director of Monark Property Partners

New government childcare rebates, coupled with a number of other well-timed market changes, have seen the Early Childhood Development and Care (ECDC) industry become an asset class to watch for astute investors.

A recent white paper, Child Care: Australia’s Burgeoning Real Estate Investment Class, by Colliers International identified an 800 per cent increase in the number of sales of child care centres from 2008 to 2016, with the highest volume of activity concentrated across the east coast.

The growth of the industry is supported by several key factors that effectively de-risk the asset class.
History of strong yields
The childcare industry has historically recorded higher yields and stronger transaction volumes than its counterparts in the office, retail and industrial sectors. For example, in September 2010 the highest yield of the past decade was recorded at 14 per cent garnered.

The spate of new competition amongst childcare operators and investors saw a sharpening of transaction yields and as a result, the industry is showing clear signs of maturity as the performance gap closes compared to other sectors.

As the market matures industry yields have consolidated. According to Savills Australia, yields have been peaking at the 6 to 7 per cent range over the past 12 to 18 months

Long term tenancy agreements
Unlike other commercial asset classes where tenancy agreements tend to be an average of ten years, the ECDC industry leases are normally 15 to 20 years, providing more certainty and stability for landlords and investors.

The stability of these tenancy agreements are amplified by the triple net-lease tenancy model used throughout the market. Under this agreement, operators are responsible for paying the building property taxes, insurance and maintenance which, under most other lease types, would fall to the landlord.
Government support
In May this year, the federal budget outlined significant changes to the childcare rebate system and will soon offer subsidies relative to income - skewed to favour lower income earners.

To take effect on 1 July 2018, the new childcare packages will provide families earning less than $65,000 per annum with an 85 per cent rebate, tapering off to 20 per cent for households earning $250,000 - $340,000.

The government objective is to incentivise families to return to work by increasing accessibility to childcare services, which may have been, until now, out of reach. A secondary objective is to invest in ECDC industry and positively impact yields, which will attract investment and generate competition and enforce pressure for higher quality of child care services nationwide.

Steady demand
According to a report released in 2017 by Early Childhood Development Agency (ECDA) since 2013 there has been a 39 per cent increase in the number of children enrolled in child care facilities and only 26 per cent increase in the number of child care centres nationwide.

The increased demand was underpinned be steady population growth as well as the female workforce participation rates, which have been on a consistent upturn since the 1980s.

The legislative changes ensure resilience of consumer income in an economic downturn for this asset and reinforces the childcare freehold as a protected asset class.

"When the above is considered, the case for child care as an asset class becomes compelling," Colliers International said in their report.

"There are few asset classes that are comparable in terms of being able to offer secure, long-dated income profile that is underpinned by explicit government support.

"This asset is future-proofed with a long history of good performance and underlying social trends that continue to support its strength.

"Backed by a sound track record and with more potential to be unlocked come 1 July 2018, developers would do well to factor this strength into their portfolios for the years ahead."

About Michael Kark: Michael is a co-founder and Executive Director of Monark Property Partners.

Within Monark, Michael is primarily responsible for setting the strategic direction, deal execution, capital raising and overseeing transaction management. Michael has a detailed understanding of property finance and a strong track record of managing third party capital.

Prior to establishing Monark Property Partners, Michael was the head of Development Asset Finance for a boutique property finance business. Prior to that Michael spent 8 years as an executive within the property division of an international investment bank. Michael started his career as a senior consultant at an international accounting firm.

Michael holds a Master of Business Administration and a Bachelor of Medicine and Surgery from the University of Cape Town.